ISSUE: Per Diem, Fair Labor Standards Act, and the I.R.S.

Jack_crop 72dpiWhat do the Fair Labor Standards Act of 1938 (FLSA)(amended many times), the Internal Revenue Code of 1954 (amended many times), and the nature of “per diem” payments to employees have to do with the Longshore and Harbor Workers’ Compensation Act?

I’m not sure, so I’ll work through it and see where they intersect.

I’ll start with section 10 of the Longshore Act (33 U.S.C. 910) which deals with the calculation of an employee’s average weekly wage, from which an injured worker’s weekly compensation rate is derived.

Back on January 15, 2014, here at the AEU Longshore Blog I discussed the Average Weekly Wage (it would be helpful at this point if you went back and read that discussion)(now if possible)(Ok.  But definitely later).

In the course of that discussion I briefly referred to several issues that arise in the course of calculating the worker’s average weekly wage, one of which was:

“’Per diem’ payments – usually not taxable thus not includable in ‘wages’, but there have been instances where so-called ‘per diem’ payments were made without reference to travel costs and were simply wages under a misleading name;”

So let’s back up and see how the FLSA and Internal Revenue Code may intersect with the concept of per diem payments in the context of calculating the average weekly wage.

The FLSA is a federal law dealing with workers’ rights; it defines the 40 hour work week, sets the federal minimum wage, and deals with many issues such as overtime, child labor, equal pay, compensatory time off, etc.  Overtime is a hot topic right now.

It applies to employers whose annual sales total $500,000 or more or who are engaged in interstate commerce.  Interstate commerce in the context of FLSA has been interpreted so broadly that let’s assume that the law applies to everybody (did you mail a business letter addressed out of state today? – congratulations, you have engaged in interstate commerce).

For its own purposes the FLSA appears to include per diem payments for meals and lodging in the definition of “wages” in some contexts and not in others, but luckily for us neither have anything to do with the I.R.S. or the Longshore Act’s usage of the term, so I’m getting out of the FLSA with the conclusion that its treatment of per diem payments is not relevant under the Longshore Act.

Let’s start over with just the I.R.S. and the Longshore Act to consider.

First, let’s clarify what we mean by “per diem”.  In its conventional form, I mean payments or a daily allowance to an employee as reimbursement for meals, lodging, and incidental expenses and for which the employee files an expense report, usually in connection with business travel or working away from home.

The I.R.S. will not treat these per diem payments as wages or taxable income to the employee.  This is a very important consideration with regard to the Longshore Act, since the Longshore Act looks to the I.R.S. Code in its definition of “wages”.

Section 2(13) of the Longshore Act defines “wages” as follows:

“The term ‘wages’ means the money rate at which the service rendered by the employee is compensated by an employer under the contract of hiring in force at the time of injury, including the reasonable value of any advantage received from the employer and included for purposes of any withholding of tax under subtitle C of the Internal Revenue Code of 1954 ….”

The Longshore Act’s definition of wages looks to the I.R.S., and “wages is defined by what the I.R.S. considers to be taxable income subject to withholding tax.  The I.R.S. does not consider legitimate per diem payments to be taxable income, thus they are not “wages” under the Longshore Act, and are not included in the calculation of the average weekly wage.

There are issues and red flags, however, when dealing with “per diem” payments.

If the employee does not file an itemized expense report, you may have “wages”, not “per diem” payments.

If the employee receives the same amount in each pay check designated as “per diem”, but unrelated to any travel expenses, you may have wages, not per diem payments.

If all employees are paid the same amount regularly designated as per diem regardless of duties or travel stratus, you may have wages, not per diem.

If an employment contract contains a provision for a fixed, regular amount to be paid under such references as “food and lodging”, “subsistence and quarters”, etc., these payments may constitute wages.

To sum up, the FLSA’s treatment of per diem payments has no bearing on the effect of these payments in establishing an injured worker’s average weekly wage under the Longshore Act.

On the other hand, the I.R.S.’s treatment of per diem payments will usually be determinative as to whether or not these payments are to be considered, “wages” under the Longshore Act and thus includable in the calculation of the average weekly wage.

But it is important sometimes to take a closer look at so-called “per diem” payments.

John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers Compensation Programs, as the Chief, Branch of Insurance, Financial Management, and Assessments and Acting Director, Division of Longshore and Harbor Workers’ Compensation.  Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of the AEU Longshore Blog.

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